A Deal on a Haircut? That’s What Friends Are For

Last week, I went to my hair salon and paid half of what I usually spend because of a deal that I—and more than 2,000 other people—bought online two months earlier. When I bought the deal, I suggested it (via email) to two friends, who each bought it and I was rewarded with two $10 credits. I used those to buy a deal at a local restaurant that gave me $40 toward food and drink for just $20. And the cycle continues.

Welcome to the world of group buying, Internet style, where the power of the Web can be utilized to offer surprisingly large discounts to a sizable number of people for things they actually want to buy.

Many of the group-buying sites work by negotiating deals with local merchants and promising to deliver crowds in exchange for discounts. The sites differ from other buying sites in how they work and what they do to reward users who share deals.

Several of these group-buying sites are available nationwide, mostly in big cities. I focused on Groupon.com, which is available in 42 cities, and LivingSocial.com, which works in 13 cities. Both are popular in Washington, D.C., where I live, though others may be more well-known in your area. If group-buying sites aren’t popular near you yet, they may soon start working there thanks to business models that allow them to work in all sorts of locations.

Other sites offer similar or slightly different selling techniques. Woot.com, a pioneer of group buying on the Web, started in 2004 by specializing in flash sales, selling a different item each day for just 24 hours or until it sells out. The site evolved from a wholesale distribution company and is known for its focus on selling technology gadgets. Another site called Tippr.com works in Seattle (not D.C., where I live, so I can’t yet use it) and uses a patented technology that makes discounts bigger as more people join a deal. New York-based Gilt.com and Ideeli.com focus on selling high fashion items at less expensive prices and can offer deals that last longer than a day.

Here’s how sites like Groupon and LivingSocial work: They ask retailers in a city to offer steep discounts ranging from around 50% to 90% off on things that would appeal to locals. Examples include 79% off spa services, 54% off at paintball, 57% off at a restaurant with Malaysian cuisine and half off for doggie day care. The site lists one retailer a day and takes a portion of the revenue generated by a deal. (Groupon usually takes half while LivingSocial takes between 30% to 50% depending on the arrangement with the merchant.)

Some sites, like Groupon, will only make the deal official if a certain number of people purchase it, while LivingSocial and others offer the deal regardless of how many people buy it.

People can be notified of these deals by signing up for daily emails from the site or by checking social networks like Twitter and Facebook. They may then purchase deals by logging onto the group-buying site and printing vouchers from the site. With most sites, you’re buying a deal for at least half off the real cost (i.e. paying $20 for $40 at a restaurant).

Both Groupon and LivingSocial will work with iPhone apps. Once downloaded, users can enter their login credentials into these apps so they can access that account’s purchased deals, allowing them to show the coupon on the iPhone at the establishment to get the deal.

Each deal comes with restrictions. For example, most of them expire within about six months or so (the date is printed on the coupon voucher and saved in your online account so you don’t forget). Some deals restrict the number of coupons per person, like the way my salon’s deal restricted people from buying more than three coupons; if three were purchased, they all had to be used in the same visit.

Since these sites work best when many people use them, they use a rewards system to motivate people to tell their friends about the deals they’ve bought. If someone shares Groupon with a friend using a special referral Web link, that friend must sign up for the site within 72 hours of clicking on the link. Then, when that person makes a purchase, the original sharer gets a kickback of $10 in Groupon credit to use toward future deals. This won’t work if the invitee isn’t a first-time Groupon customer.

LivingSocial’s rewards system works a little differently. If you buy a deal and share it with friends using a special Web link, you can get the deal free of charge if three friends use that link to sign up for the site and buy the deal. Separate from that, LivingSocial encourages users to invite friends to simply sign up for the site. If the invitee signs up, he or she gets $5 toward deals. If he or she purchases a deal, the original inviter also gets $5 toward deals.

Both Groupon and LivingSocial put a lot of emphasis on choosing deals that will serve as city guides to the hip and fun activities going on around town. Groupon divides some of its 42 cities into areas: For example, Washington, D.C., is divided into The District, Northern Virginia and Montgomery County—three unique zones that locals will appreciate seeing listed separately.

Not every deal is successful on group-buying sites. Groupon’s idea of selling tours of Gary, Ind., shortly after Michael Jackson’s death didn’t convince enough buyers to want to visit the King of Pop’s hometown. LivingSocial admits that some of its deals were too specific to be popular, like a dog-training class that didn’t fetch enough buyers. The site’s CEO Tim O’Shaughnessy says there might not have been enough people with new dogs at the time of the deal.

If you haven’t tried one of the many group-buying Web sites and you live in an area where they’re available, you’ll want to check them out—or find someone who already uses them to invite you so you can both get rewarded.

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